Either you believe in Micron Technology, Inc. (NASDAQ:MU) or you don’t. But if you’re going to invest in an often volatile or sometimes irrational MU stock, a proffered and creative combination spread for bulls may be just the ticket once again. Let me explain.
Of all the semiconductor stocks in the universe of publicly traded companies, no stock ticker embodies price volatility on a daily basis like MU stock. And Tuesday was no different following an analyst note from RBC Capital which initiated shares with an outperform rating and an above-market price target of $80.
The bullish appraisal had the effect of pushing Micron higher by more than 4.5%, much to the delight of bulls now enjoying gains in excess of 22% in just over two weeks. Bottom line — or more aptly, as the squiggly line on the price chart shows — volatility is definitely a two-way street in MU stock. Just ask investors how they enjoyed the prior couple weeks or even the past two or so months, within a bull market like no other in the realm of semiconductor stocks.
MU Stock Daily Chart
Since last writing about MU stock in early April and as denoted by the highlighted candlestick on the provided daily chart, shares have improved their bullish positioning. The building technical strength however hasn’t been void of Micron’s notorious and volatile stock swings.
Currently and after forging a lower-low, high-level corrective double-bottom of nearly 29% in depth, shares have rallied swiftly higher by about 22% over the last couple weeks. The volatile but bullish reversal is solid confirmation of an intermediate bottom now in place and an eventual breakout to fresh highs.
Admittedly, it’s easy to see today’s stochastics setup or Bollinger Band positioning as indications of MU stock having come too far, too fast. But with Micron’s brand of volatility there are no guarantees overbought conditions won’t beget more of the same. Of course and as implied above, those same forceful price reactions could always find MU taking another stab at forcing bullish investors to throw in the towel prematurely.
MU Stock Bullish ‘Combined’ Spread Strategy
I can’t promise results like those provided by our most recent combined spread strategy, but this type of position still makes a good deal of sense and certainly provides for much stronger risk-adjusted returns (and losses) than a simple purchase of MU stock.
One favored combination is selling the July $52.50/$50 put spread and purchasing the July $57.50/$62.50/$65 call butterfly. With shares at $55.90 the combination is priced for a small debit of 25 cents and allows for a bullish profile with vastly reduced and limited risk.
Optimistically, but certainly far from out of the question, if MU stock continues to rally the break-even on this position is $57.25 at expiration. During the life of the spread though, time-value based profits would accrue. The max profit capture is $4.75 if shares landed at $62.50 on expiration. That of course would require a good deal of luck. But if Micron ramped up even higher, and probably a more likely scenario, the investor is guaranteed a profit of $2.25 above $65 due to the favorable construction of the butterfly position.
Alternatively, if MU stock dips modestly but shares remain above $52.50 at expiration, the investor will lose the token debit paid to enter the position. The forfeited small-change is certainly nice compared to the 6% decline in share price.
Further, if MU’s undesirable volatility really picks up steam once again, this investor is assured of limiting his or her exposure to $2.75 or a shade under 5% of the risk of owning Micron shares. Even better, that risk would require MU to drop below $50 or 10.55% from its current price.
Lastly and not to be ignored, another benefit of this spread combination is the July contract keeps the investor fully-protected through next week’s analyst day and an event which could prove pivotal for investors, as well as next month’s earnings release.
Investment accounts under Christopher Tyler’s management currently own positions in Micron (MU) and its derivatives. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
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